Sunday, April 3, 2011

Sola Dosis Facit Venenum?

When I was studying at McGill University, I wasn't sure what I wanted to do in life so I majored in economics, minored in mathematics and took a bunch of health science courses as electives just in case I wanted to follow my father, brother and friends into medicine. That meant a full year of organic chemistry, biochemistry and physiology. For my intellectual stimulation, I audited Charles (Chuck) Taylor's courses in political philosophy. He's the greatest professor I ever had, a true genius.

My friends thought I was nuts, a masochist who was biting off more than he can chew. They were right but I didn't care. I never obtained the perfect grades needed to apply to medical school because rote memorization of biochemical pathways just bored me to death. So I went on to finish my Master's in Economics as I was more comfortable with macroeconomics (even though the stuff they teach students in university isn't what I call hands-on economic and financial analysis; it's way too theoretical, almost entirely based on mathematical theorems).

I ended up getting an "A" in my Master's thesis criticizing the literature on growth empirics (see my comment on Galton's Fallacy and the Myth of Decoupling). I was proud of that accomplishment because at that time (1997) I got diagnosed with multiple sclerosis (MS) at the age of 26 and had to take some time off from writing my thesis. I went through a tough period where I withdrew from my family and friends and spent all my time at the McGill medical school scouring over all the articles on MS I could find. I wanted to know everything: the good, the bad and the downright ugly.

This lasted for a couple of months but at one point I got sick and tired of reading articles on MS and decided to get on living my life. I did however learn a lot about MS and diet which led me to Ashton Embry's wonderful site, Direct-MS.org. It's there that I learned about nutritional strategies and the importance of vitamin D3 supplementation. Ashton and I have kept in touch ever since.

I don't follow or endorse any MS diet but I do believe in eating properly and high dose vitamin D, which is something I referred to a few times in my blog. In 2009, I read about a small study from the University of Toronto which showed that of the patients taking elevated doses of vitamin D, suffered less relapses than the control group and had a 40% lower rate of relapses then they had the year before the study began. Another study funded by the U.K.'s MS Society, the MS Society of Canada, the Wellcome Trust and the Medical Research Council, found that vitamin D seems to help control a gene known to increase the risk of MS — a finding that suggests taking vitamin D supplements during pregnancy and early in life may help prevent the disease.

About a year ago, I decided to start taking massive doses of vitamin D, roughly 30,000 IUs a day (30 vitamin D drops) which is well above the recommended daily allowance (which by the way, is way too low!). I felt great and started losing a lot of weight, shrinking from a size 36 waist to a size 32. Losing weight doesn't concern me as I needed to shed excess weight. But I also lost muscle mass, have back pain and lately I haven't been feeling up to snuff on the inside and it has nothing to do with my CCSVI procedure. Just a general malaise which some of my doctor friends think is related to my high intake of vitamin D. I decided to pass my blood tests (good luck finding a GP in Quebec!) and I started reading on vitamin D Hypervitaminosis, a toxic condition associated with excessively high vitamin D doses (Much higher than what I'm taking. Those of you who want more information can go over this excellent presentation on the connection between vitamin D and MS.)

Why am I sharing all this with you? It goes back to what my organic chemistry professor at McGill, Dr. Joe Schwarcz, told us during a lecture one day: "sola dosis facit venenum," which literally means "the dose makes the poison." And this is my preamble to my comment on what I'm seeing in the financial system right now. There is a tremendous amount of liquidity out there which is making a lot of people nervous. I'm talking about people managing hundreds of billions in assets, worried about how all this liquidity is going to play out in the years ahead.

Liquidity into the financial system is primarily coming from the Fed which is keeping rates at historic lows and engaged in massive quantitative easing (QE) campaign buying up bonds to keep rates low. Why is the Fed keeping rates low? There are several reasons. First, despite signs that job growth is finally picking up significant steam, unemployment remains stubbornly high. Second, as I mentioned last week, the dismal housing market is not recovering and if you saw 60 Minutes on Sunday night, there is a real risk that a second downturn in housing is on its way (see video below; simply mind-blowing mortgage scams the banks were engaging in!).

"Banks do not mark their commercial real estate to market. Quantitative easing (QE) is all about giving banks enough of a cushion to absorb these losses. For Bernanke, keeping the system afloat takes precedence over everything else. Not sure he's wrong but he's solving one crisis by sowing the seeds of another."

He referred to Carmen Reinhart and Ken Rogoff's book,This Time Is Different: Eight Centuries of Financial Folly and told me that he's worried that something might happen over the next few years. "What am I suppose to do? If I'm too conservative, I risk underperforming. But markets are schizoid right now and not at fair value. Markets are rewarding indiscriminately -- it's a very tough environment to operate."

It's a tough environment because everything is going straight up. As I wrote last week, it looks and feels a lot more like 1999 than 2008. And as public pension plans fuel the explosive growth in hedge funds, there is going to be a lot more volatility in the financial system as funds go long and short stocks, bonds, commodities and currencies.

Leo de Bever is right, the Fed is sowing the seeds of another disaster but this bubble can go on a lot longer than the doomsayers think. We'll see what this week's Fed minutes say but judging from the comments, some FOMC hawks are already very nervous. Nonetheless, the Fed Chairman feels that the dose of monetary easing is right and the policy remains reflate risk assets and introduce some inflation in the system to avoid a prolonged period of debt deflation. For now, it seems to be working but when the music stops playing, watch out, all those hedge funds and big bank prop desks will be liquidating their positions faster than you can say "QE".

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I am an independent senior economist and pension and investment analyst with years of experience working on the buy and sell-side. I have researched and invested in traditional and alternative asset classes at two of the largest public pension funds in Canada, the Caisse de dépôt et placement du Québec (Caisse) and the Public Sector Pension Investment Board (PSP Investments). I've also consulted the Treasury Board Secretariat of Canada on the governance of the Federal Public Service Pension Plan (2007) and been invited to speak at the Standing Committee on Finance (2009) and the Senate Standing Committee on Banking, Commerce and Trade (2010) to discuss Canada's pension system. You can follow my blog posts on your Bloomberg terminal and track me on Twitter (@PensionPulse) where I post many links to pension and investment articles as well as my market thoughts and other articles of interest.

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